Dreamworld CEO addresses media

Tax reform eludes government

The government all but abandons serious tax reform - at least for now. Peter Martin explains what's in and what's out.

It has ruled out major change in favour of a pair of savings measures seen as politically safe: curbing the excessive use of negative gearing by wealthy investors, and reducing extensive parking of pre-tax income in superannuation accounts.

The minimalist reform approach would raise sufficient funds to offer marginal tax relief to middle-income earners while also freeing the government to prosecute a massive scare campaign against Labor, claiming its negative gearing policies would smash the economy, wiping $278 billion off the national balance sheet through a 5 per cent plunge in housing values.

Prime Minister Malcolm Turnbull says Labor's policy of allowing negative gearing only on new properties might knock 10 per cent off the price of a typical home. Photo: Alex Ellinghausen

The government's final package, due to be presented within weeks, will not restrict negative gearing to new houses, as Labor has proposed, but merely impose caps on the dollar amount of losses claimable, while also reducing the amount able to be directed into superannuation contributions.

The proceeds, perhaps just a few billion per year, will be available to fund an upward adjustment of the $80,000 tax threshold, providing relief to only the top 25 per cent of earners.

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The government again struggled to get its lines right on Wednesday, after Assistant Treasurer Kelly O'Dwyer contradicted Prime Minister Malcolm Turnbull's prediction of falling house prices under Labor's policies, by declaring they would actually rise.

"They have got a policy that will increase the cost of housing for all Australians, for those people who own a home and for those people who would like to get into the housing market through their negative gearing policy," she told Seven's Sunrise program.

Fairfax Media understands the Coalition has seriously considered and rejected a scheme that would have taxed all superannuation contributions at the taxpayer's marginal rate minus a discount, which most likely would have been 15 percentage points.

The Prime Minister and colleagues were concerned that although the scheme would have been fairer, extending the same discount to all taxpayers, it would have made earners in the $37,001 to $80,000 bracket slightly worse off, taxing their super contributions at 17.5 rather than 15 per cent and exposing the government to a scare campaign.

Instead they have opted to tighten the generous caps on how much high earners can contribute to super out of pre-tax income. At present $30,000 for most taxpayers and $35,000 for those over the age of 50, the annual caps would be cut to nearer $20,000. Fairfax Media has been told they are also looking at tightening the separate, so-called non-concessional cap that allows contributions out of after-tax wages of up to $180,000 per year.

They will leave untouched the tax-free status of super withdrawals and super fund earnings in retirement.

The government has also rejected the option of more fully taxing capital gains, opting instead to curb negative gearing "excesses" by imposing a generous limit on either the number of properties that can be negatively geared or on the dollar value that can be deducted. One limit under consideration is $50,000 per year.

Mr Turnbull said Labor's policy of allowing negative gearing only on new properties might knock 10 per cent off the price of a typical home.

"If it comes down by 10 per cent, that family will have lost one-third of their net worth," he said. "The honourable members opposite ask us to believe that that is not going to have any impact on their investment, on what they will spend, they have. We all know what will happen."

The minimalist approach set to be adopted by the Turnbull government will allow it accuse the opposition of recklessness while raising a small amount of money to spend easing bracket creep.

Calculations by the Grattan Institute suggest that it would cost only $600 million to lift the entry point for the second-highest tax bracket from $80,000 to $85,000. The sum is small because only about one quarter of taxpayers earn more than $80,000 and because the jump between the bands is only from 32.5 to 37 per cent.

The Prime Minister and Treasurer might be able to fund deeper tax cuts by winding back allowable income tax deductions. They are waiting on a report on deductions they commissioned from a House of Representatives committee. However, they are understood to be unenthusiastic about the idea because they don't want to create aggrieved losers.

The package will be sold as an attempt to clean up abuses rather than recast the system. Decisions about some measures, including the company tax rate, may be postponed until after the election.